CAT Stock Takes a Positive Posture (For Now)

by Serge Berger | January 28, 2014 7:59 am

Construction and mining equipment maker Caterpillar (CAT[1]) kicked off this week’s heavy earnings slate Monday morning with a Street-beating Q4 report that sent CAT stock higher by nearly 6%.

beat-the-bell-cat-stock[2]Caterpillar earnings came to $1.54 per share[3] vs. the estimated $1.28, thus beating by 26 cents. CAT also beat on the top line, reporting $14.4 billion in revenue to top the Street consensus for $13.64 billion. On a year-over-year basis, earnings were 6% higher on sales that declined 10%.

Meanwhile, the Caterpillar earnings forecast for the current quarter surprised too, with CAT expecting $5.85 per share vs. $5.78 projected by analysts. Caterpillar also sees sales of $56 billion vs. Street expectations for $55.30 billion.

The cherry on top — Caterpillar announced it would buy back $10 billion in CAT stock, with the repurchase program to begin with roughly $1.7 billion worth of shares in Q1 2014.

All in all, earnings, forecasts and the buyback announcement helped soften the revenue blow, and traders and investors alike bid CAT stock higher to the tune of 5.94% Monday — this in the face of further weakness in the broader markets.

If we take a step back and consider CAT stock’s multiyear, weekly logarithmic chart, there are two important formations around which to focus. First is Caterpillar’s double top in April 2011 and February 2012, and second is the narrowing trading wedge that has formed since early 2012.

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The support line in place at the bottom of the narrowing trading wedge — currently around the $82 area — offers a great level in the medium term, for a break below there would be blatantly bearish. On the upside, CAT stock in December broke above the upper resistance point of the trading range, and that has bullish implications until the just mentioned support level gets violated.

On the daily chart, a second and even more narrow trading range has been in place for most of 2013, which also was broken during the December rally. Note how closely together the 50-, 100- and 200-day moving averages are still trading, which simply represents the the tight trading range of 2013. The December rally out of the trading range ultimately failed last week when CAT stock again fell toward the middle of the range, but before many bears could react, Caterpillar shares found support at those moving averages.

The on Monday, CAT gapped significantly higher at the open and closed well higher on the day.

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So, what’s a trader and investor to do here with CAT stock? For my part, I would like to see some sort of follow-through buying commitment in coming days to see if Monday’s bounce can be trusted. If this comes to pass, then a break above $93 could well lead to a move toward the high $90s in coming months.

Alternatively, if Monday ends up having been marked as just a one-day wonder bounce, then I will leave Caterpillar stock be and might be interested in playing the short side if (and only if) it can break below the $82 area.

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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here[5]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. CAT:
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  3. Caterpillar earnings came to $1.54 per share:
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